My Economics Paper

As obvious as it sounds, economic principles are usually only used when studying the economy, past, present, and future. These principles were created for the specific purpose of describing how the economy works, both in theory and in practice, so it’s only natural that this should be their main application. However, with a wider scope, it’s possible to see that these economic goals, policies, and theories can relate to common events in everyday life. To view the average person’s daily routine through the lens of an economist might seem unusual, but a careful analysis results in a better understanding of the almost unconscious process of human interaction. In their book Freakonomics, Steven Levitt and Stephen Dubner define economics as “…at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing” (16).

The arguable cornerstone of economics is the principle of supply and demand. When the supply of a product is low and the demand for it is high, a vendor can charge whatever price he wishes for the good in question. When the supply is high and the demand is low, he doesn’t quite have this freedom. The basic principle here is that a good is worth whatever someone is willing to pay for it; this can potentially dictate a price substantially higher than the good’s retail value.

For example, I was once in a large lecture class that required its students to bring blue books for every exam. During the first exam of the semester, a student entered the room five minutes into the exam, sat next to me, and promptly realized that he had forgotten to buy a blue book. Running off to buy one would take at least ten minutes, time that he didn’t have to spare. The supply of spare blue books was extremely limited, and his demand for one was almost off the charts – the exam was worth thirty percent of the final grade. Smiling to myself, I realized that anyone who happened to have an extra blue book in his backpack could have named any price that this student would be obliged to pay.

Here, the concept of inflation comes into play. The basic gist of inflation is that the cost of a certain good fluctuates as a result of outside circumstances – it takes more or less money to acquire the same product. In the economy, the price of imported cars in dollars, for example, rises or falls based on the exchange rate of the currency between the two countries. Similarly, in real life, people often find that it suddenly requires more effort to obtain the same result. A young man trying to woo a girl finds that paying her a compliment and buying her a cup of coffee gets him a kiss on the cheek at the end of the night. One night, after the compliment and the coffee, she gives him a hug and leaves. The following night, he takes her to dinner at an expensive restaurant and takes her dancing afterward. Sure enough, at the end of the night, he gets his kiss. Based on the progression of the relationship, a kiss on the cheek costs more.

In the above example, the price of a blue book (normally just thirty-nine cents) has skyrocketed because of the unfortunate student’s immediate need for the good. Three hours before the exam, the student would be crazy to buy a blue book for any more than retail price. During crunch time, however, with forty-five minutes left in the exam and no blank blue book in sight, the value of the good begins to inflate exponentially. Again, the value of a good is whatever the person is willing to pay for it. Let’s say that the entrepreneurial merchant’s asking price for his extra blue book is twenty dollars. The (admittedly disgruntled) student wouldn’t be paying that amount of money for eight sheets of paper stapled together; he’d be paying for his only option for salvaging his grade in the class. An “A” instead of a “C” in a class is of inestimable value, but twenty dollars seems like a good start.

Now, the obvious objection to this situation is that no good person would corner someone into this type of deal just to make a little bit of extra cash. While it wouldn’t surprise me if something akin to this situation has happened at least once, it’s certainly not the common response. I pose the following question: why? If economics is the study of incentives, and someone has both the means and the opportunity to make a quick buck, why wouldn’t he? It’s a bit dodgy, ethically speaking, but ethics aren’t usually a major factor in strictly businesslike transactions. There must be some other reason that this person with an extra blue book is more inclined to hand it over with a wink and a smile than to make the other person reach for his wallet.

To answer this question, I apply the principle of the balance of payments – regarding trade, a country wants to export as many goods as it can while simultaneously importing as few goods as possible. Just as a countries trade goods on a massive scale, people trade goods and services with those around them on a daily basis. A man offers a soda from his refrigerator to his neighbor. A student lets a classmate copy her notes. A girl moves her friend’s car out of a no-parking zone before the car gets towed. The societal norm seems to be that money doesn’t change hands during such personal interchanges; a person will do his friend a favor with the implication that the favor will be reciprocated later.

I would therefore like to propose the theory that in a group of close friends, especially in communal living environments like dormitories, doing favors for one another acts as the “currency” of the relationship. If someone does a small favor for me, I “owe” him one small favor. If I do a big favor for someone, he “owes” me either one big favor or several small favors. This system is obviously much more flexible than the dollar system, but on the whole, it seems to consistently match the daily interactions of acquaintances. As a side note, it is theoretically possible for one to live his life in a “closed” economy, that is, a completely self-sufficient person who doesn’t rely on anyone around him for anything, but this usually doesn’t last very long. Everyone requires someone else’s help at one point or another. We will therefore work with the model of an open market.

For example, say that John and Steve go out to lunch. John has forgotten his wallet, so Steve pays for the entire meal. Instead of reimbursing Steve with the exact dollar amount as soon as possible, John will probably just pick up the check the next time he and Steve eat together. Steve did a favor for John (“exporting” his good will), and later, he received one in return (“importing” John’s good will). The transaction is complete. Just as with national trade, it is better for one’s net exports to be positive than negative. A person who constantly does favors for his friends without asking for repayment for its own sake has a trade surplus, a useful stock that he can take advantage of should the need arise. A person who constantly asks his friends for goods and services without repaying them has a trade deficit; his friends will likely see him as a “moocher” and be less inclined to do favors for him in the future.

Booms and slumps can be explained by a person’s attitude over a given period of time. A student who aces two tests and receives an acceptance letter from the graduate school of his choice in the same day is likely to be in a pretty good mood – he’d probably be willing to grab his roommate’s laundry from the dryer before it gets stolen or buy a round of drinks on a Friday night. By amassing these favors while in his positive emotional state, he’s going through a boom. Conversely, a student who has three midterms and a research paper all due in a single week will probably turn to his friends more than once in order to make it through. Borrowing notes from someone here, his roommate bringing him dinner there – the deficit builds up pretty quickly. He’s going through a slight slump. Both of these are common, and in the long run, the booms and slumps of a hectic college student’s life tend to balance each other out.

Returning to the above example, then, a student won’t charge his classmate twenty dollars for a blue book because he wants to retain his ability to receive a favor in the future. A person’s current “trade status” is not necessarily private information. What favors he does, for whom, and how often are all pretty common information just through gossip and small talk among his friends. The person who sells his classmate a blue book for twenty dollars damages his reputation considerably in the process. News of this irregularity will spread, and his friends will stop asking him for favors for fear of what he will ask in return. Since his friends aren’t asking him for any favors, in turn, they feel less obligated to do favors for him. Isolation ensues. Though this man’s actions are perfectly logical in an economic sense, they demonstrate what kind of deals he has the habit of making, lowering the chance of future interactions.

The quote from Levitt and Dubner makes it a point to distinguish wants from needs. Three hours before the test, the student wanted a blue book. Five minutes into it, he needs one. While it is certainly unjust and irregular to charge twenty dollars for something he so desperately needs, it might not be quite as unjust to overcharge for a nonessential good. For example, in college towns, fast food restaurants close their dining areas at midnight but keep the drive-through lane open all night long. However, the restaurants don’t serve food to people who walk through the lane – since many college students don’t have cars, this is a bit of a setback. A student with a car is in the position to make a little bit of money for himself. He can park his car in the parking lot with a sign in the passenger’s window that says, “I will drive you through for five dollars.” At one or two o’clock on a Friday night, he’s likely to have several (quite possibly inebriated) takers. Again, the price that someone is willing to pay for a cheeseburger has inflated because of his mental state and the lack of other options.

The difference between the two situations is the distinction between necessity and desire. Charging twenty dollars so that someone can pass an exam might as well be stealing, since the student has no other options besides paying the asking price. With the fast food example, though, the buyer makes the conscious choice to pay the five-dollar “transportation fee.” He doesn’t “need” a cheeseburger like the student needs the blue book, so there can be little comparison between the two.

Examining real life situations from an economic perspective provides an interesting view on human nature, both psychologically and sociologically. The study of the average person’s incentives, needs, and the lengths to which he will go to obtain these needs is a very practical use of time. A rational, unbiased, fresh perspective on the unconscious happenings of everyday life can be quite educational and can significantly increase the quality of one’s social life.